U.S. Default Prospect Hurts Economy in the Meantime

As negotiations over the debt limit continue in Washington and the date on which the U.S. government could be forced to stop paying some bills draws closer, everyone involved has warned that such a default would have catastrophic consequences.

But it might not take a default to damage the U.S. economy.

Even if a deal is struck before the last minute, the long uncertainty could drive up borrowing costs and further destabilize already shaky financial markets. It could lead to a pullback in investment and hiring by businesses when the U.S. economy is already facing elevated risks of a recession, and hamstring the financing of public works projects.

More broadly, the standoff could diminish long-term confidence in the stability of the U.S. financial system, with lasting repercussions.

Currently, investors are showing few signs of alarm. Although markets fell on Friday after Republican leaders in Congress declared a “pause” on negotiations, the declines were modest, suggesting that…

Continue Reading →

This article was written by Lydia DePillis and Ben Casselman and originally published on www.nytimes.com